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Article Artículo

Our Elites Refuse to Accept Responsibility for Leaving Behind the Left Behind

There have been several analyses of the 2018 election results showing that the Republican regions are disproportionately areas that lag in income and growth. In response, we are seeing a minor industry develop on what we can do to help the left behinds. 

The assumption in this analysis is that being left behind is the result of the natural workings of the market — developments in technology and trade — not any conscious policy decisions implemented in Washington. This is quite obviously not true and it is remarkable how this assumption can go unchallenged in policy circles.

Just to take the most obvious example, the natural workings of the market were about to put most of the financial industry out of business in the fall of 2008. In the wake of the collapse of Lehman, leaders of both the Republican and Democratic parties could not run fast enough to craft a government bailout package to save the big banks, almost all of which were facing bankruptcy due to their own incompetence and corruption. 

It is worth contrasting this race to bailout with the malign neglect associated with loss of 3.4 million jobs in manufacturing (20 percent of the total) between 2000 and 2007 (pre-crash). This job loss was primarily due to an explosion in the trade deficit. The latter was due to an overvalued dollar, which in turn was attributable to currency management by China and other countries, that kept their currencies below the market level. 

While most economists now acknowledge the impact of China’s currency management, at the time there was a great effort to pretend that this was all just the natural workings of the market. The loss of jobs, and the destruction of families and communities, was not a major concern in elite circles, unlike the prospect of Goldman Sachs and Citigroup going bankrupt.

CEPR / November 30, 2018

Article Artículo

Saving the Environment: Is Degrowthing the Answer?

This piece originally appeared on my Patreon page.

A friend recently sent me a piece by Jason Hickel, arguing that growth can’t be green and that we need to move away from growth-oriented economics. I am not convinced. It strikes me both that the piece misrepresents what growth means and also confuses political obstacles with logical ones. The result is an attack on a concept that makes neither logical nor political sense.

In the piece, Hickel points out the enormous leaps that will be required to keep our greenhouse gas emissions at levels that will prevent irreversible environmental damage. He then hands us the possibility, that even if through some miracle we can manage to meet these targets with the rapid deployment of clean energy, we still have the problem of the use of other resources that is wiping out species and wrecking the environment.

Hickel’s points about the imminent dangers to the environment are very much on the mark, but it is not clear that has anything to do with the logic of growth. Suppose the Sustainable World Party (SWP) sweeps to power in the next election. They immediately impose a massive tax on greenhouse gas emissions, which will rise even further over time. They also inventory all the resources that are in limited supply and impose large and rising taxes on them.

Furthermore, they pay developing countries large sums to protect regions that are important for sustaining species facing extinction and for the global environment. The new administration also hugely increases spending on research on clean technologies and has massive subsidies for zero-emission vehicles and even more importantly for mass transit. As the SWP implements this policy, it has very stimulative fiscal and monetary policies.

Will the economy continue to grow through this transition? That’s hard to say. If the price of gas quadrupled people would obviously drive less and buy fewer cars. On the other hand, since the government is throwing money at them with its fiscal and monetary policy, they may choose to spend more money on things that are not inherently research. They may spend more money on education, seeing movies and plays, gym memberships, eating at restaurants, better software for their computer and other types of spending that don’t either directly involve the use of resources or at least not obviously more than the alternative. (Eating at a restaurant obviously involves consuming food, but it doesn’t necessarily mean consuming more food than eating at home.)

But whatever happens in the transition period, what would keep the economy from growing in subsequent years? We have locked down all the resources in short supply and preserved large chunks of the world from encroachments by roads and settlements, but it is hard to see why we would not be developing better health care technology, better software, more types of cultural output, better housing (in the sense of being more pleasant — not necessarily larger) and other improvements in living standards, all of which count as growth in GDP.[1] Where is the war with growth?

CEPR / November 24, 2018

Article Artículo

The Distortions from Tariffs and the Distortions from Patent Monopolies

Jim Tankersley had a very interesting piece in the NYT on how clothing manufacturers manage to minimize the impact of tariffs. The gist of the piece is that the tariffs led to very few jobs in the United States, but instead cause companies to spend lots of time gaming the system. We would presumably rather see them spend their time trying to design better products and production techniques.

While this a very interesting piece, that is written in reference to Donald Trump's latest and future rounds of tariffs, it would be interesting to see a similar piece in reference to patent monopolies, especially in the case of prescription drugs. While the tariffs discussed in the piece range from 7 percent to 27 percent, in the case of prescription drugs, patent protection often raises the price by a factor of 100 or even more. This is equivalent to tariffs of 10,000 percent. The vast majority of drugs would sell for ten to twenty dollars per prescription in a free market, instead of the hundreds or thousands of dollars that are charged as a result of patent protection.

Patents have a purpose (as does all protection), providing an incentive for researching new drugs. But there are other mechanisms for financing research (see chapter 5 of Rigged and this paper). To have a basis for assessing the merits of the different systems we need to know the costs they imply.

In the case of patent monopolies, these costs are enormous. The NYT piece goes through the efforts companies will go through to avoid tariffs of 20 percent — think of the efforts that people can and do go through to avoid patent monopolies that are equivalent to tariffs of 1000 percent.

CEPR / November 24, 2018